MSCI Emerging-Markets Index May Rise 28%, Morgan Stanley Says

Nov. 10 (Bloomberg) -- Emerging-market stocks may rise 28 percent by the end of 2010, with gains slowing from this year’s pace amid concern interest rates and oil prices will increase, according to Morgan Stanley.

The MSCI Emerging Markets Index may rise to 1,200 by the end of next year, compared with the Nov. 6 level of 936.36, strategists led by Jonathan Garner said in a report. They set a forecast of 486 for the MSCI Asia Pacific excluding Japan Index, representing a 23 percent gain from last week, according to a separate report.

“Economies and earnings are recovering and it is likely too soon in the cycle for a major peak in emerging-market equities,” Garner, Morgan Stanley’s chief Asian and emerging- market strategist, wrote in the report dated yesterday. “However, we do face the headwinds of monetary policy tightening and a higher oil price.”

Emerging markets have led the rally in global stocks this year, making up all 10 best performers among the 89 country benchmarks tracked by Bloomberg. The MSCI index for 22 developing nations has climbed 65 percent in the year till Nov. 6, set for its best annual performance since 1993, while the MSCI Asian excluding Japan index has rallied 60 percent during the same period.

The MSCI Emerging Markets Index rose 2.5 percent to 959.66 yesterday. Garner, who predicted in June that the measure will rise to 985 over a 12-month period, said shares in developing nations tend to reach a “local peak in performance” before the Federal Reserve’s first rate increase.

“Micro” themes will dominate emerging markets next year, and investors should favor energy, financial and so-called consumer discretionary stocks, the brokerage said. They cut technology stocks to “equal-weight” because of valuations and “historical sensitivity to a global rate hike cycle,” according to the note sent to clients.

Morgan Stanley said China is the bank’s biggest country “overweight” while South Africa is the largest “underweight.”